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European REITs May Become Takeover Targets on Low Valuations

European real estate investment trusts have become likely takeover targets after share prices failed to keep pace with asset values, JPMorgan Chase & Co. said.

Companies that may attract bids include the U.K.’s Hammerson Plc, Big Yellow Group Plc, Helical Bar Plc, Metric Property Investments Plc and Workspace Group Plc and Amsterdam-based Eurocommercial Properties NV, analyst Harm Meijer said in a note to investors. REITs in Europe are trading at an average discount to their net asset values of 29 percent, he said.

Simon Property Group Inc., the biggest U.S. mall owner, this month agreed to buy 28.7 percent of its European shopping-center operator Klepierre SA for about 1.52 billion euros ($2 billion), giving it the largest stake. British Land Co. and Land Securities Group Plc should consider becoming buyers because their capital costs are below the industry’s average and prices are low, according to Meijer.

“The whole European sector looks vulnerable” he said. The European REIT market is now in a “shape up or ship out” mood and failure by management to focus and improve will result in “horrendous” shareholder returns or buyouts, Meijer said by telephone.

The value of European REITs may rise 14 percent within the next 12 months, and the U.K. should perform best at 16.5 percent, according to Meijer. The U.K.’s FTSE 350 Real Estate Investment Trust Index has risen 7.8 percent since Simon’s purchase of the Klepierre stake.

‘Superior Returns’

Hammerson’s discount to net asset value should narrow after the company sells its office portfolio, JPMorgan said in the note. The developer decided to focus on retail assets because they expect “superior returns” compared with office buildings, Chief Executive Officer David Atkins said in a Feb. 24 presentation to analysts.

Hammerson typically trades at a 23 percent discount to net asset value compared with a 13.6 percent discount at retail specialist Capital Shopping Centres Group Plc., Sue Munden, a real estate analyst at Seymour Pierce Ltd., said by telephone.

“The market values them differently,” Munden said. She has a reduce rating on Capital Shopping Centres Group Plc, meaning she expects its absolute return to be down 5 percent to 10 percent over the next 12 months. She doesn’t have a rating on Hammerson shares.

Hammerson rose as much as 2.3 percent today, the most since March 8 when Simon announced the Klepierre deal. The shares were up 1.2 percent as of 3:20 p.m. The FTSE 350 REITs Index was up 1.6 percent.

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